Manufacturers in the auto industry, mainly commercial vehicles and two-wheelers, have already incurred a loss owing to the heavy discounts that were offered to clear out BS III stock and further costs will have to be born by companies in order to dispose the unsold stock. The Supreme Court last week banned sale and registration of BS III vehicles. This ban would cost commercial vehicle and two-wheeler makers nearly Rs 3,000 crore, according to market research firm Crisil. The commercial vehicle manufacturers would stand to lose Rs 2500 crore, while two-wheeler manufacturers too would lose about Rs 460-480 crore.
According to the report, commercial vehicle (CV) makers disposed over half their stock of BS III vehicles before the Supreme Court set April 1, 2017 deadline. "The discounts and incentives on vehicles sold till March 31, 2017, are expected to have cost them about Rs 1,200 crore. Additionally, Rs 1,300 crore would be incurred to dispose of the unsold inventory," Crisil Research said.
The impact of this on the EBIDTA margins of listed truck makers (Ashok Leyland and Tata Motors' standalone) will be around 2.5 per cent of their revenues, it said, adding that the impact would affect 2017 and 2018 fiscals as the inventories would have to be brought back from the dealerships and then disposed.
The report revealed that CV makers had continued manufacturing BS-III vehicles until March in anticipation of vast sales in closing weeks of the financial year, considering hiked price tags on BS IV vehicles by about 8-10 per cent.
Before the ban was in place officially, it was widely believed that some BS III vehicles would be allowed to be sold in April, and hence some manufacturers kept at building BS III vehicles which bloated the inventories. At the time when SC ruling came, CV dealers' at risk inventory was around 97,000 units (equivalent to 1.7 months of sales), valued at Rs 11,600 crore. The industry is expected to have sold around 55 per cent of this in the last three days of March by offering discounts of 20-40 per cent on the sticker price compared with around 10 per cent before the ruling.
About 40,000-45,000 units of unsold inventory may be returned in the upcoming months, mainly comprising less-popular models since there were instances of supply shortage in some popular BS-III models. The companies may upgrade them for resale or dismantle vehicles for spares or incur higher working capital for holding the inventory until it is exported, which could take 5-6 months, the report added.
For two-wheelers, outdated inventory stood at 670,000 units, amounting to Rs 3,800 crore (half-a-month of sales) when the SC ruling came. However, by offering heavy discounts, from 10-30% and additional free insurance, the dealers could clear most of the stock in the last three days of March.